How do you make sure that your SaaS application is relevant and the end users are happy with the solution? In the past, you were able to charge for the solution in one big payment, but with the new subscription-based licensing model, you will have to retain the customer happy throughout the contract period and if the person is not happy, they will not continue using the software.

I have stated before in my blog posts that a net new client and the associated Customer Acquisition Costs (CAC) will have to be absorbed in a year or less, but the reality is something else. Therefore, if the customer quits using the solution after the first contract term (typically one year), the ISV will not even recoup the costs that were accumulated to get it in the first place. If you look at the included picture from Joel York (2010), you will see that the ISV will cover the overall customer acquisition costs by signing up new customer and eventually the ISV will make a profit as it will cover the CAC costs when the Churn is also considered. I explained this in more detail in my blog entry “ISV transitioning to the Cloud, Cloud Financials and Operational Metrics”

As developers and engineers, we typically fall in love with what we do and we expect the end users to do the same thing. Wrong. Won’t happen and have been there, done that. What we need to be doing is to building employee software as the Bessemer Top 10 Cloud Computing Law states (#Law5) and I described this in my previous blog entries. If we do not use the software ourselves within the company and act as real customers, why would we expect customers be the ones where we test the usability. You would be surprised how many times we have seen solutions entering the market without any testing. The question now becomes how the solution can be tested prior of delivery and also in scenarios where the SaaS ISV enables a trial version of the software. How can the ISV make sure that most of these trials are converted to real customers? How can we monitor the application usage and also identify possible use cases that lead to an unsatisfied customer/user?

Luckily, there are some innovative companies thinking about this and one of these is Totango that has recently announced a beta version of a solution that helps SaaS vendors to be more effective in retaining customers and also converting trials and freemium licenses to fully paid clients. According to CIO.com article, many SaaS vendors have adopted a freemium pricing model, which is an evolution of the traditional 30/day free trial model according to CIO.com. The freemium model enables users to use the software in perpetuity, but the freemium model is usually missing some key components/elements that the user organization needs and will there want to upgrade to.

Totango provides an “instrumentation layer” that tracks relevant business events that enables the ISV to really understand the application usage. The funny thing is that I used to build this kind of functionality into business intelligence solutions, specifically executive briefing books so we could evaluate if a report/graph was necessary and what had to go away. Back then, we wanted to make sure that the decision support group did not build charts/reports that were useless as this would be waste of time and money. Today a SaaS application that does not appeal a user will lead to churn and churn and low growth means slow death to the SaaS ISV. It is as simple as that.